I think one of the reasons I fell in love with personal finance
is that like all other stems of math, there seemed to always be just one right solution. In high school, I could BS my way through a written English exam with the best of them, but a math test? You had to know your stuff. And that’s what attracted me to this field: I liked knowing that if I made the right choice, I would end up with enough money in the bank to support the life I wanted to live.
However, once I started writing this blog, I quickly realized that personal finance wasn’t all black and white. Yes, it’s a lot of numbers, but there’s also a lot of emotion that goes into managing your money properly. People out there have a million different circumstances that can affect their financial decisions, and those in similar situations may choose different paths that ultimately lead to the same success.
For instance, most personal finance gurus will tell you it’s idiotic to get a tax refund each year, because it means you’re giving the government an interest-free loan. And essentially, they’re right. You could take that extra income from your paycheck, invest it, and come out with more than your refund would have been in the spring. But would I do that? Doubt it.
And that’s why I always try to plan for a tax refund each year. Yes, that’s right: I do what most personal finance experts say not to. However, I personally do a better job of allocating that money towards savings and investments when I get that lump sum than I would if I’d had it in my bank account every month. So why follow what I “should” do when it isn’t going to serve me and my goals?
Choosing the reasonable route or purported “right” path isn’t always what’s best for you in your situation. Here are three other instances where doing what most in the financial world would suggest to better your financial situation could actually hurt you.
1. Investing In Your 401(k)
Investing in your 401(k) is a great move…if you’ve already got an emergency fund in place and aren’t living paycheck to paycheck. When you fund your 401(k), you are essentially saying “see you later” to that cash until you reach age 59 ½. Why? Because if you pull it out before then, you are going to not only be taxed on that money, you’ll also be charged a 10% penalty. Yikes.
If you’re living paycheck to paycheck and/or without an emergency fund, you don’t want to tie up any savings into an account that you can’t tap into without paying a fee. Emergencies do happen, and getting the employer match in your 401(k) sometimes isn’t enough to make it worth holding your cash hostage.
Instead, I suggest you diversify your investments a bit. If you want to contribute some to your 401(k) to get the employer match, go ahead; however, also allocate a portion into a Roth IRA, where you can pull out any principal you contributed without penalty. It will allow you to invest, but also give you a savings cushion if you run into a money-sucking situation. Then, once you’ve had time to build up your emergency fund, you can start fully funding your 401(k) again until you hit the employer match.
2. Buying A Home
The biggest farce I hear these days is that renting is just a mechanism for throwing your money away, but millennials are starting to realize that homeownership isn’t all it’s cracked up to be. In fact, nearly 66% of those 35 and younger put off buying a home, which has led to the lowest homeownership rate for that age group in history. Yes, if you buy a home, it does mean that a portion of your monthly payment is allocated to building equity. But it also means you now have to pay property taxes. And higher insurance. And all of the repairs or maintenance.
It also means you’ll more than likely need to get a lawn mower. Maybe an alarm system. Mulch in the spring? Yep. All those little costs add up, so while most think buying a home is a smart financial decision, that’s not always the case. In fact, I did a study on my personal situation, and if I was renting, I would be in the same financial position I’m currently in owning my own home.
Don’t feel the pull to buy a home if the situation isn’t right for you. It takes a lot of money and time, so if you value your freedom and ability to spend your cash on things you value more, renting is absolutely fine. Just be sure that you rent reasonably. No one needs a new downtown apartment when they have a ball of debt chained to their ankles.
3. Getting A College Degree
It used to be the ticket to a great career, but a 4-year degree no longer carries the weight it used to. Not only does that piece of paper no longer assure you’ll get a job, but with the average student loan debt per college graduate totaling nearly $37,000, it’s an even more motivating factor to find a better option.
The world is starting to value those who are creative, innovative, and entrepreneurial over those with the traditional skills often taught at college. It has been calculated that by 2020, nearly 50% of all jobs will be freelance positions, and many of these can be done through self-study or real-world experience instead of through pricey college degrees. On top of that, trade schools offer a great alternative, as they cost less, and the skills they offer are currently in high demand.
If you’re a high school senior or have one in your household, don’t think a 4-year degree is automatically the path to success. Research the alternatives, find the most economical way to get to your career goal, and save yourself the frustration of a low-income/high student debt situation in your early 20s. You’d rather be using that money to travel, right?
There you have it: three popular money moves that personal finance gurus teach that may end up hurting you in the end. Remember, none of these are inherently bad advice, but they could be bad for you. Focus on your goals and what you value, and develop a plan that best fits YOU.
Now I’d love to hear from you! What’s the worst financial advice you’ve ever been given?
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